PNG’s exchange rate policy hurting the poor

East Asia Forum - 5 hours 14 min ago

Author: Paul Flanagan, ANU

Earlier this year, Papua New Guinea moved away from a market-based exchange rate. It seemed just a technical announcement at the time. The central bank indicated that the exchange rate would float within a narrow band around the interbank exchange rate. However, this seemingly innocuous announcement has major implications for PNG’s future development. This is because the interbank exchange rate, frozen between October 2013 and 4 June 2014, no longer reflected the market equilibrium of supply and demand. Forcing all foreign exchange transactions to take place at the interbank rate implied an effective appreciation of the currency by 15 per cent relative to the actual market-based exchange rate of 3 June.

What are the practical implications of moving away from a market-based exchange rate?

The first week in June 2014 was a bad one for coffee growers in PNG. Around 2.1 million people — just over a quarter of PNG’s total population of 8 million — live in households that earn a significant part of their income from coffee. At the start of the week, they could get 6 kina (US$2.16 for each kilogram of coffee they sold to the factory gate in Goroka in the PNG highlands. One week later, they could only get 4.60 kina (US$1.90 based on the higher exchange rate) a kilogram. World coffee prices had fallen by around 5 per cent. But of much greater significance was that the 15 per cent appreciation of the kina on 4 June flowed immediately through to prices obtained by farmers. This cut potential income by 15 per cent. Analysis by the World Bank shows that a 13.7 per cent decline in kina terms in coffee prices (around the impact of the 15 per cent appreciation of the kina) could have pushed an additional 130,000 people living in coffee-growing households below the poverty line. Those already below the poverty line would be even poorer. Similar losses in income faced other agricultural exporters. This single decision is having a dramatic impact on rural poverty in PNG — and the vast majority of PNG’s estimated three million poor live in rural areas.

By setting a price in international markets above market rates, the government is also creating some winners. Importers are better off, as prices for imported goods are now potentially 15 per cent cheaper. Assuming the reduction in the wholesale price is passed through to consumers, someone living in Port Moresby can now purchase a kilogram of rice for 15 per cent less than previously. Another potential winner might be someone with a new government building contract, as the costs of imported materials such as concrete and steel are now cheaper. Paying off international loans is also now cheaper in kina terms. Buying overseas property would also be cheaper for PNG residents whereas international investors wanting to invest in PNG will face higher costs. Overall, then, the decision is bad for PNG’s international competitiveness.

There are also market risks in setting the official rate higher than what demand and supply for foreign currency might dictate. Pegging the currency at an artificially high rate requires controlling the release of foreign currency from reserves. Such quantitative restrictions have many risks. Ultimately, choices must be made between which importers get access to foreign currency. Will it be importers of fuel or fertiliser or rice? The inevitable rationing of foreign exchange is a growing concern for all PNG businesses.

Despite the obvious problems with the appreciation of the kina, returning to a market-based exchange rate has risks as well, such as putting upward pressure on inflation. But there doesn’t appear to be a realistic long-term alternative. The kina has officially begun to depreciate, but at a very slow rate. It will take another two years at the current rate of depreciation to get back to the exchange rate that prevailed on 3 June. And that is a long time for PNG’s rural poor to endure lower real incomes, to discourage investment in PNG and to ration foreign exchange for businesses.

Paul Flanagan is a Visiting Fellow at the Development Policy Centre, The Australian National University. Until recently he was Chief Advisor in the Foreign Investment and Trade Policy division at the Australian Treasury.

Categories: Forum

Does the WTO ruling against China on rare earths really matter?

East Asia Forum - 17 hours 14 min ago

Author: Nabeel Mancheri, Tokyo University

In August, the Appellate Body of the WTO ruled that China’s export duties, quotas, and administration of rare earths, tungsten and molybdenum products violated various provisions of the GATT and the Accession Protocol that China promised to implement when it joined the WTO in 2001.Ruling in favour of the US, the EU and Japan, who had filed a joint complaint in March 2012,the WTO asked China to remove its export tariffs and quotas within a reasonable amount of time or face punitive retaliatory tariff measures.

The WTO ruling will not have a considerable impact on a rare earths market which already operates imperfectly. Instead, the ruling can be considered as a political win against an assertive and rising economic player. Even though China applied a number of restrictions on the export of rare earth elements,As a result, prices for most of rare earth minerals have almost declined to their 2011, pre-bubble levels.

In the last couple of years, rare earth prices have been unpredictable. In the short term, the WTO ruling could push prices further down by increasing Chinese supply. Last year, China’s rare earth exports rose by 38.3 percent, but the export value fell by 36.7 percent in the same period. The impact has already become visible in the market. The prices of the rare earth elements cerium, lanthanum and ytterbium plunged by 40 percent in the second half of last year and the trend has continued into this year as the average price of rare earth elements has fallen back to the levels of 2010.

Those who jumped into the rare earth business when prices climbed sharply in 2011 and 2012 are now doubtful about future prospects. Share prices of companies such as Lynas of Australia and the US’s Molycorp are following a downward trend these days, as investors have lost interest, even following the WTO ruling. This shows that the problems with rare earths lie elsewhere. No country other than China has enough expertise or the manufacturing facilities to refine oxides to metals. It has turned out to be more economical for companies such as Molycorp to export these minerals mined abroad to Chinese factories.

China may comply with the WTO ruling and lift the export restrictions, fearing large repercussions. Anticipating an unfavourable ruling, the country had already initiated a number of steps to control its rare earth resources. The major drive is to consolidate the industry into a few big conglomerates, with almost 300 rare earth firms either ordered to suspend production or having their production licenses revoked in the last few years. All legitimate companies — from mining to smelting, separation and utilisation —were merged into six large national rare earth conglomerates based on geographical location.

Consolidation of the industry would enable China to effectively control supply and to an extent prices. This is an industry that China has developed strategically as a complete supply chain starting from the early 1990s, ensuring any of the high-end rare earth products must originate or pass through China’s vast value chain. It has reached a level where even US defence industries are dependent on China for some of their advanced materials and components, including the magnets used in F-35 fighter jets.

China supplies almost 90 percent of global rare earth minerals and consumes about 70–75 percent. According to a US Government Accountability Office Report, as of 2010 China controlled 97 per cent of rare earth ore, 97 per cent of rare earth oxides, 89 per cent of rare earth alloys, 75 per cent of the neodymium iron boron magnets industry and 60 per cent of the samarium cobalt magnets industry. This dominance extends to the production of key intermediate products, such as magnets —many of these products being critical inputs for high growth industries such as hybrid cars, windmills and lighting.China is assiduously building up dominant positions in the entire supply chain of rare earths. China incentivises domestic companies to produce more technologically-advanced products rather than exporting raw materials abroad.

China continues to strengthen its hand in all stages of the supply chain, including refining, production of metal, alloy, components, and materials Over the last decade, China has encouraged nearly every major multinational utilising rare earth to move their manufacturing facilities to China or to establish subsidiaries in China. From a trailing position, China has successfully overtaken the more advanced countries in the rare earths industry and has gained enough capacity to control the whole value chain.

Nabeel A. Mancheri is a visiting research fellow at the Institute of Social Science, Tokyo University.

Categories: Forum

Is Vietnam in denial on military strategy?

East Asia Forum - Wed, 10/29/2014 - 16:00

Author: Shang-su Wu, RSIS

Vietnam’s recent, and significant, investment in military hardware is aimed at coping with a changing strategic environment. But will it make any significant difference in balancing against China’s military might in the South China Sea?

Over the last ten years, Vietnam has been especially focusing defence investment in its air and naval capability. This has included the purchase of Su-30MK2 fighter bombers, Project 636 submarines, as well as several types of surface vessels and missiles. These purchases may reveal Vietnam’s inclination towards an anti-access and area denial (A2/AD) strategy aimed at preventing foreign access or activities in its territorial waters. But in the face of the superior Chinese military power, Vietnam’s military procurements appear inadequate for pursuing an A2/AD strategy and may not achieve their intended goal.

First, as surveillance is the key for a ‘denial’ strategy, Vietnam’s existing platforms for maritime surveillance are potentially vulnerable. Hanoi has introduced three types of maritime surveillance aircraft (DHC-6-400, M-28P and C-212) for its air force and coast guard. But these slow propeller-powered aircraft are easy prey for Chinese fighters’ beyond-vision-range missiles, and even surface vessels’ long-range surface-to-air missiles (SAMs). Although Hanoi has launched a remote sensing satellite using French technology and management, its function for denial operation could be limited. The remote sensing satellite is to scrutinise geographic and geologic information rather than real time intelligence on the location of Chinese vessels. Additionally, the French management of the satellite may not cooperate with Hanoi’s military demands due to pressure from Beijing’s. If those aerial surveillance platforms are unable to search maritime targets during warfare, most Vietnamese strike units would need to find their own targets, and an optimal distribution of fire power would be less likely.

Second, Vietnam has a smaller number of sophisticated weapon systems than China. In terms of the third and fourth generation fighters, surface vessels and submarines, Vietnamese forces have even less than half of those in the Guangzhou Military Region. This leaves the Vietnamese military with a smaller margin for loss, presenting a disadvantage in attrition war. Vietnamese submarines may overcome certain asymmetrical disadvantages in the short term but would struggle in the long term. The People’s Liberation Army Navy’s (PLAN) South Sea Fleet could also deploy submarines outside major Vietnamese naval bases, such as Cam Ranh Bay, to monitor their operation.

Third, both Hanoi and Beijing procured several similar Russian weapon systems, such as the Su-30MK2, Project 636 submarines and S-300 PMU-1 SAMs. Due to the earlier purchase and China’s famous reverse engineering, the Chinese forces can already grasp the complete performance and characteristics of these weapon systems — Vietnam can’t. As a result, Hanoi may lose some tactical surprises which are supposed to compensate for their quantitative inferiority. In sum, Vietnam’s military modernisation may not achieve an A2AD strategic goal.

Finally, domestic budget constraints also suggest that another wave of massive military hardware procurement is unlikely. As such, it is unlikely that Vietnam will possess substantial capabilities in the foreseeable future.

Nevertheless, although Hanoi’s effort on defence may not effectively check Beijing’s massive military power, it does provide some strategic value. First, Vietnam is able to deter China much better than before. Compared to the end of the last century, the disincentives for Beijing using force against Vietnam are much greater. In order to ensure a successful outcome, the PLA would have to deploy more units to counter its Vietnamese counterparts. But more units would decrease strategic surprises and leave a more aggressive impression of China among the international community. As the Philippines — another ‘frontline’ state facing China’s strategic pressure — strengthens its defence through the Enhance Defence Cooperation Agreement (EDCA) with the United States, Vietnam’s considerable investment in defence could make it harder prey for China’s expansion or assertiveness.

Second, Hanoi’s military modernisation may serve as a bargain chip in negotiation with other powers for security cooperation. Vietnam’s investment in defence could lower the cost of intervention and ensure its commitment to defence rather than overall dependence. This would increase the possibility of extended deterrence or external intervention from a third party. And it would improve the military balance between Vietnam and China. But in view of Beijing’s increasing economic and military capability, a third party power may hesitate to support Hanoi in fear of the high costs of confrontation.

Overall, Hanoi’s military modernisation has not dramatically changed its attitude toward Beijing. Despite tension over conflicting territorial claims, Vietnamese decision makers still contact their Chinese counterparts through party-to-party and other channels. Considering the bilateral economic ties and inferior military capability, Hanoi may continue with a cautious tone in its relations with Beijing.

Dr Wu Shang-Su is Research Fellow at the Institute of Defence and Strategic Studies, S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore.

Categories: Forum

Sino–Japanese relations 120 years after the war

East Asia Forum - Wed, 10/29/2014 - 04:00

Author: Liu Jiangyong, Tsinghua University

The year 2014 marks 120 years since the First Sino–Japanese War. While the two nations have enjoyed several decades of peace, there is an uneasy feeling in China that recent developments and revisions to the Japanese constitution draw parallels with the decade prior to 1894.

In that year, under the pretence of defending their consulate and expatriates, the Japanese government sent troops to the Korean peninsula and invaded China. Four years earlier, in December 1890, the then Japanese prime minister and ‘father’ of Japanese militarism, Aritomo Yamagata, made a policy speech claiming that there were two lines to be guarded if Japan wanted to be capable of self-defence. The first was the ‘sovereignty line’, which traced the border of Japan’s national territory. The second was the ‘interest line’, which referred to any area within which the safety of the sovereignty line was intimately related.

The Korean peninsula was of course the first to be regarded as part of the ‘interest line’ by Japan. Yamagata, an aggressive proponent of this expansionist theory, became commander of the Japanese First Army in 1894, during the administration of Hirobumi Ito. Under his leadership Japanese troops invaded the Korean peninsula up to Pyongyang before marching straight on to Liaodong, China. After the annexation of the Korean peninsula, with the expansion of its so-called sovereignty line, Japan expanded its ‘interest line’ towards northeast China. By the same logic, the Japanese military subsequently created the Mukden Incident in 1931 and the Incident of July 7 in 1937, and launched an all-out invasion in China, leading to a legacy of war crimes.

Today, nearly 70 years since the Second World War and the retreat of Japanese imperialism, similarities have emerged between Sino–Japanese relations now and the relations in the decade before the outbreak of the First Sino–Japanese War. Despite strong public opposition in Japan, Prime Minister Shinzo Abe has recently made cabinet resolutions to amend the interpretation of the Japanese constitution to lift the ban on collective self-defence and proceed with amendments to the Self-Defense Forces Law. There have also been discussions with the United States about modifying the Japan–US defence cooperation guidelines and the division of military responsibilities. All of this indicates that Japan has abandoned its ‘special defence’ policy and is paving the way for joint operations with the military forces of the United States and other close allies.

At this stage the scenarios set by the Abe Cabinet that would permit use of military force include those when nations in close relationships with Japan are under attack and those needed to defend the life and liberty of Japanese people. There is an uneasy feeling in China that this expansion of Japan’s conception of its self-defence marks a return to the ‘line of interest’ referred to by Yamagata in 1890. The mood is that these seemingly unwarranted excuses and vague assumptions are being made with the Korean peninsula and China in mind.

Japan will not only be looking to continue strengthening its US alliance but will also include countries such as the Philippines and Vietnam among those nations with which it shares a close relationship. These countries have maritime territorial disputes with China, and placing them in this category would allow Japan to provide them with patrol boats and other such support.

Furthermore, Japan has been strengthening its ties with NATO—signing a new accord this year to increase cooperation. And Abe, on his latest visit to Australia, announced that the two countries would deepen military cooperation. These seeming attempts to form a wider strategy to contain China mark the first time Japan has acted in this way in nearly 70 years since the end of the Second World War.

The Japanese people are beginning to realise that this revision to the Japanese constitution is a violation of the conception of peace set down in that document. Rather than protecting the Japanese people, it is setting up a regional military posture which risks the lives of Japanese soldiers. It is little wonder then that the Abe cabinet’s actions will inevitably be strongly opposed by Japan’s peace-loving people, and cause vigilance and resistance from its Asian neighbours.

Abe is playing a delicate game of international diplomacy. While expressing his willingness to meet with Chinese leaders, Abe is simultaneously launching a diplomatic battle against China. He has shown no sign of repentance after visiting the Yasukuni Shrine late last year. While claiming that the door is always open for dialogues, he refuses to hold dialogues with China on the territorial issue of the Diaoyu/Senkaku islands. Japan appears to be looking forward to the Sino–Japanese summit in November but in fact refuses any communication when it comes to the most urgent issues to be addressed, such as the Diaoyu/Senkaku islands dispute. The Japanese side is fully aware that without formal lines of communication it will be nearly impossible for the Sino–Japanese summit to take place.

One important motive for Japan behaving in this way is to create the impression that it is China that does not act in accordance with international practice, so enabling it to seize the higher ground of public opinion. Yet no matter how elaborate Abe’s plan is, as long as it goes against the current of developing global peace and the will of the Japanese people, it will eventually fail completely. One hundred and twenty years since the outbreak of the First Sino–Japanese War, relations between the two countries are as troubling as ever.

Liu Jiangyong is a Professor and Associate Dean at the Institute of Modern International Relations at Tsinghua University.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes’‘.

Categories: Forum

After historic IPO, where to from here for Alibaba?

East Asia Forum - Tue, 10/28/2014 - 16:00

Author: Mark J Greeven, Zhejiang University

Chinese e-commerce giant Alibaba has a track record of breaking records. It not only operates the world’s largest online business-to-business platform, but also the world’s largest online consumer marketplace. In 2004, it had the largest initial public offering (IPO) since Google on the Hong Kong Stock Exchange. In 2014, Alibaba had the biggest IPO in US history with its debut on the New York Stock Exchange on 19 September. Its founder Jack Ma — the first mainland Chinese to appear on the cover of Forbes magazine — and his core team have, in just 15 years, built a Chinese private company that is a global force to be reckoned with.

Jack Ma is not the only Chinese entrepreneur with potential and the world may need to prepare for a wave of global Chinese companies.

Alibaba’s strong IPO on the New York Stock Exchange indicates strong confidence in the company, on the part of both Alibaba itself and its domestic and foreign investors. Alibaba’s IPO is, first and foremost, evidence that a home grown private Chinese company can play with the big boys. Alibaba’s consumer-to-consumer platform Taobao had already proven 10 years ago that an unknown private Chinese company can best its large rival eBay in the Chinese domestic marketplace. Now having engineered the biggest stock offer ever in US history, raising US$25 billion, Alibaba is big enough to take on the leading companies in global markets.

Alibaba’s IPO is not just a commercial success, but also a national success. Alibaba has effectively raised the image of Chinese businesses abroad and created a fertile business ecosystem. The company has created 25,000 jobs and has led to the establishment of millions of small household companies that rely on its platform. This business ecosystem is what differentiates Alibaba from other global technology giants.

Alibaba’s IPO is an enormous confidence boost for other Chinese companies. China’s tech scene is booming. Innovative companies such as smart phone producer Xiaomi, online retailer, food delivery company Elema and taxi app Kuaidi are transforming traditional industries at break-neck speed.

Alibaba’s competitors Tencent and Baidu (often the three are referred to collectively as ‘BAT’) are already playing a global game — both are listed abroad and are exploiting their first mover advantages in the Chinese market. BAT are acting as investor big brothers of a new wave of tech ventures. These start-ups are likely to remain smaller than established Chinese companies, such as BAT, but could potentially develop breakthrough technologies. Tencent, Baidu and Alibaba each made more than 10 strategic investments and acquisitions in the last year. It is likely that Alibaba will use its newly raised capital to continue the acquisition war with Tencent and Baidu.

The question is, besides acquiring more technology start-ups in the coming years, what will Alibaba do with its significant resources?

One direction Alibaba might pursue is its ambition of building a nation-wide logistics network, dubbed the China Smart Logistics Network, in the next 8 to 10 years. Jack Ma combined Intime, Fosun, Forchn Holdings Group, STO Express, YTO Express, YunDa, and SF Express together to establish the China Smart Logistics Network with an investment of 300 billion renminbi (US$49 billion). The China Smart Logistics Network is designed to facilitate the further expansion of online shopping by setting up a network to deliver parcels within 24 hours to approximately 2000 Chinese cities. The network aims to support 30 billion yuan (US$4.9 billion) in online sales per day.

Technological changes are becoming ever more frequent. In particular, recent developments in big data are happening fast. Alibaba is sitting on top of what may be the world’s largest consumer behaviour database, but it is yet to be seen to what extent they can monetise its value.

Alibaba’s IPO is just the tip of the Chinese iceberg of private companies and technology ventures that will play an important role in changing and upgrading China’s economy, and further integrating it into global markets.

Mark J Greeven is Associate Professor at the School of Management, Zhejiang University.

Categories: Forum

What to expect from the new US–Japan Defense Guidelines

East Asia Forum - Tue, 10/28/2014 - 04:10

Author: Ken Jimbo, Keio University

When the current Guidelines for US–Japan Defense Cooperation were released in 1997, the core strategic impulse of Washington and Tokyo was to deal with potential armed contingencies in Northeast Asia, namely regarding the Korean peninsula and Taiwan. As the US Asia strategy emphasised deterrence of and response to these contingencies, Japan reconfigured its alliance strategy from predominantly territorial defence to proactive cooperation with the US in ‘situations in areas surrounding Japan’.

In the 17 years since the 1997 Guidelines were established, there have been tremendous changes in the strategic environment, the state of the US–Japan alliance and Japan’s role in it. During the first decade of this century, the US and Japan expanded their common strategic objectives, driven mainly by the global anti-terrorism campaign.

The emerging strategic focus in the 2010s is undoubtedly driven by the rise of China. The continued modernisation of China’s military forces, and its recent assertive behaviour in territorial disputes in the East and South China Seas, is altering the post-Cold War strategic foundation of the US–Japan alliance.

The new US–Japan Defense Guidelines, which are expected to be released by the end of 2014, are likely to encompass four new operational domains.

First, the new Guidelines will address rising ‘grey zone’ challenges: infringements of Japanese territory that do not amount to a full-scale armed attack.

As Beijing has stepped up its assertive behaviour in the East and South China Seas, it has become increasingly apparent that the territorial status quo can be challenged without crossing the military threshold. For this reason the Interim Report on the revision of the Guidelines, released on 8 October, emphasised cases ‘where swift and robust responses are required to secure the peace and security of Japan even when an armed attack against Japan is not involved’. The new Guidelines will stress that both governments should have a ‘seamless’ response in all phases of a conflict, including ‘grey zone’ challenges.

This is a significant clarification of US involvement in ‘grey zone’ situations. The Interim Report could have suggested a divisional role-sharing model instead, where Japan takes sole responsibility for grey zone contingencies, while the US becomes involved later in escalation control. This division of roles would have also reflected Washington’s desire to avoid entrapment.

But a lack of US involvement in grey zone conflicts in such a role-sharing approach would be inherently risky. China could encroach on disputed zones through ‘tailored coercion’, without the risk of direct US involvement. This potentially undermines the credibility of US extended deterrence.

Against this background, the decision to adopt a seamless and all phases approach signals that Japan’s coast guard, law enforcement agencies, and Air and Maritime Self-Defense Forces — which have primary responsibility in grey zone contingencies — are inseparable from the dynamics of the US–Japan alliance.

To operationalise this seamless approach, the US and Japan will further enhance joint intelligence, surveillance and reconnaissance operations, joint training and exercises in grey zone scenarios, and cooperation among all government sectors.

Second, the new Guidelines will address how to counter China’s expanding anti-access and area-denial (A2/AD) capability. The modernisation of China’s conventional military capabilities is increasingly placing the US forward presence and its operations at risk. The People’s Liberation Army’s short and medium-range missiles, as well as its increasingly sophisticated navy and air force are becoming more capable of denying the US the ability to generate substantial combat power from its bases in the Western Pacific.

From the Japanese perspective, the most critical element of the US security commitment is the deployment of combat-ready US troops on Japanese soil. Without in-theatre logistical and basing support, the US and Japan cannot achieve pre-planned military operations and the augmentation of US forces.

As outlined in the Interim Report, protecting military facilities, air and missile defence, as well as resiliency, hardening and damage recovering capabilities are key to countering the A2/AD environment. The new Guidelines are also likely to suggest wider dispersal options in both commercial and non-commercial Japanese airports and ports to ensure flexible operations for US forces stationed in Japan.

Third, the US–Japan Defense Guidelines will emphasise cooperation for regional security. In 2013, the Joint Statement of the US–Japan Security Consultative Committee highlighted the importance of regional capacity building, maritime security, disaster recovery, trilateral cooperation with Australia and South Korea, and multilateral cooperation, especially with ASEAN countries.

Most symbolically, Japan and the US have already begun building the defence capacity of the Philippines. Japan has promised to provide coast guard patrol vessels to the Philippines. The Abe administration is also seeking to reform the guidelines for official development assistance (ODA) to allow for the strategic use of ODA to build recipient countries’ defence capacity. Currently, Japan’s ODA guidelines do not allow it to support foreign armed forces.

The United States is also upgrading its Navy and Marine Corp’s operational access to the Philippines and offering support for their defence capabilities. These two approaches will be further integrated to jointly craft a favourable balance of power in the South China Sea.

Fourth, the US–Japan Defense Guidelines will address bilateral cooperation on new technologies, space and cyberspace. The US and Japan will work to ensure the resiliency of relevant space assets, networks and systems. Japan has called for the Japan Aerospace Exploration Agency to provide information to the United States. This signifies Japan’s movement towards a deeper interagency approach for the national security agenda. Cooperation in cyberspace will include improvements to individual cyber capabilities, interoperability and sharing information about cyber threats.

These expected revisions to the US–Japan Defense Guidelines will provide a more effective framework for both nations to better manage the contemporary strategic environment in Northeast Asia.

Ken Jimbo is Associate Professor at the Faculty of Policy Management, Keio University.

Categories: Forum

Continuity the key to New Zealand’s regional participation?

East Asia Forum - Mon, 10/27/2014 - 16:09

Author: Gary Hawke, NZIER

New Zealand’s approach to regional affairs is unlikely to change with the recent re-election of Prime Minister John Key. The election, held on 20 September, provided a clear mandate for Key’s National Party. The routine three-yearly election was brought forward by a few weeks to provide certainty about who would represent New Zealand at the end-of-year meetings of APEC, the East Asia Summit, and the G20.

While there was little explicit attention to regional affairs in the election campaign, they were not far below the surface. Much of the media attention was focused on allegations of ‘dirty tricks’ by politicians and forthcoming revelations of illegal surveillance by security agencies. The former resulted only in evidence that some politicians now use modern social media in much the same way that some earlier politicians misused print media. The latter showed that there cannot be sensible public debate about security issues conducted by a media which sees itself as making the news through sensationalist sound bites rather than reporting significant information. The campaign generated no new information at all.

The election debate therefore never approached the question of how New Zealand’s participation in the ‘Five Eyes’ arrangement fits with New Zealand’s place in the contemporary world. The Five Eyes arrangement links the security services of New Zealand with Australia, Canada, the United Kingdom and the United States. Like the structure of the UN Security Council, or the distribution of votes in the governance of the World Bank and IMF, the arrangement originated in the era of the Second World War and there needs to be continued evaluation of how it fits changed circumstances. But that requires serious study of the costs and benefits of the present arrangement and feasible alternatives, not electioneering rhetoric. The appropriate balance between maintaining traditional friendships and adapting to a changed world will be one of the major issues facing the New Zealand government, and it starts without any electoral guidance.

The nature of New Zealand’s participation in the international or regional economy was not addressed honestly. Regional issues surfaced only in the context of opposition to overseas investment in New Zealand land. Currently, such opposition does not consider whether Chinese investment differs from foreign investment from other sources. Nor does it consider how New Zealand can benefit from economic integration if cross-border investment flows are regarded with suspicion — when it is obvious that New Zealand firms need to invest overseas to participate in regional and global opportunities. Open opposition to participation in the Trans-Pacific Partnership and other integration processes was mostly limited to questioning specific provisions, despite these provisions not yet being determined let alone known. But a wider change was never far beneath the surface.

The trade debate is in large part a proxy for the debate about open market economies that is at the core of the problems of the opposition Labour and Green parties.

The election result was a disappointment for Opposition parties. New Zealand First, which is little more than a vehicle for the populist career of Winston Peters, did not find itself in a kingmaker’s role and as Peters ages, the party’s future is uncertain. The Green Party ended with about the same proportion of the vote as in 2011, not the gain it expected to take it into office as a significant coalition partner. It now faces another three years in opposition and a good deal of reflection as it faces claims that environmentalism would be better served without the belief that it is indissolubly linked to left-wing causes. All previous efforts to separate the two have failed and the prospects for any quick change are dim.

But the big loser was the Labour Party. Its share of the vote was just 25 per cent. (The National Party got 48 per cent). The Labour Party had changed its leader to David Cunliffe, who was thought more likely to attract support than his predecessor David Shearer. But instead the Labour Party suffered its worst result since 1922. It is now engaged in a bitter leadership battle. Shearer suggested that Cunliffe should leave parliament, but he has only withdrawn from the leadership race because ‘at this time’ somebody else might better unify caucus. That is an understatement.

In any case, the problem for the Labour Party is not the personality of the leader but the inability of the party to focus on the future while it continues to battle over its past. It is deeply torn over whether or not the economic achievements of the Labour Government of the 1980s should be entirely disowned. Does it embrace the internationalist economic stance adopted in the 1980s or does it wish to return to a protectionist, insulated economy? The depth of disagreement means that the future existence of the Labour Party is not assured.

For the foreseeable future, New Zealand’s participation in regional affairs will be characterised by continuity. In the longer term, it depends on resolution — or at least evolution — of domestic debates about fundamental economic strategy.

Gary Hawke is an Associate Senior Fellow at the New Zealand Institute of Economic Research, and a member of the Academic Advisory Council of the Economic Research Institute for ASEAN and East Asia.

Categories: Forum

Is that as good as it gets for Abenomics?

East Asia Forum - Mon, 10/27/2014 - 04:13

Author: Tobias Harris, Teneo

As the second year of Abenomics progresses, Prime Minister Shinzo Abe’s program of coordinated monetary and fiscal stimulus and structural reform has lost some of its lustre. Not only have Abe’s approval ratings fallen below 50 per cent for the first time since he took office in December 2012, but a recent poll in the right-wing Sankei Shimbun found that, for the first time, disapproval of Abe’s economic policies had exceeded its approval ratings, with 47 per cent opposed and 39 per cent in favour. Coming amid reports of slowing inflation following the consumption tax rate increase in April and weak export data, slumping public support for Abe and Abenomics suggests that the Japanese government’s policy experiment could be losing steam.

To the extent that Abenomics depends on Bank of Japan (BOJ) Governor Haruhiko Kuroda’s quantitative and qualitative easing program, the experiment is insulated from the vagaries of public opinion. However, from the beginning, the BOJ’s radical measures to defeat deflation were only a first step towards a broader revitalisation and transformation of the Japanese economy that would strengthen Japan’s global competitiveness and raise its long-term growth potential. Restoring inflation would create the right economic and political environment to implement extensive reforms to the labour market (including increasing the role of women in the workforce) and the inefficient agricultural and service sectors, foster a new system of corporate governance to generate greater returns for investors, and reshape how the public and private sectors invest in next-generation technologies.

To realise these policy changes, which have in many cases been pursued by Japanese prime ministers for decades, Abe would have to overcome resistance from entrenched interests in the bureaucracy, the ruling Liberal Democratic Party (LDP) and in the economy more broadly, wielding strong public support — and the vote of confidence in Abenomics from foreign investors in the form of buoyant equity markets — as a weapon against defenders of the status quo.

Despite his rhetoric, Abe has proven to be a reluctant reformer, unable to translate his political capital into concrete policy outcomes. His 2013 and 2014 growth strategies, the centrepieces of the so-called ‘third arrow’ of Abenomics, have disappointed, signifying more a return to old-style industrial policy than a dramatic break with past practice. When it comes to difficult structural reforms like labour market reform, the growth strategies have offered only modest changes and do little to introduce more flexibility or reverse the growth of low-paid part-time and other temporary employment.

More significantly, in setting lengthy implementation timelines, the Abe government has allowed bureaucrats, LDP backbenchers and lobbyists to fill in the details of the strategy’s skeletal proposals, further watering down the government’s reform agenda. With most of the 2014 growth strategy’s legislative items delayed until the 2015 regular session of the Diet, Abe continues to show no great urgency in his pursuit of structural reform.

Why have Abe’s achievements thus far lagged behind his promises?

The reasons are numerous. First, structural reform is difficult. Were it easy, one of Abe’s reform-minded predecessors would surely have found a way to achieve it. But in practice, structural reform means uprooting economic institutions that have endured since the 1930s, when they were introduced by Japan’s militarist government and then were retained by the post-war US occupation.

As the leader of a messy, pluralistic democracy populated by interest groups that have profited from existing institutions, Abe cannot simply change the Japanese economy by decree. Of course, Abe’s pursuit of structural reform is further complicated by the fact that his LDP has profited from the status quo more than most. The LDP is at best ambivalent about structural reform and, despite Abe’s personal popularity and the broader power shift to the prime minister’s office, the party is still capable of undermining the government’s agenda, as happened when Abe’s regulatory reform council floated a proposal to abolish JA-Zenchu, the national council of agricultural cooperatives. The reform council’s trial balloon met with fierce resistance from LDP backbenchers who forced the government to back away from outright abolition and allow JA-Zenchu to participate in the reform process.

Finally, Abe may himself be ambivalent about reform or, at the very least, be reluctant to engage in open conflict with members of his own party about structural reform. It is significant that one of Abe’s first decisions when he became prime minister for the first time in 2006 was to readmit LDP members who had been expelled from the party in 2005 for opposing the postal system reforms of the then prime minister, Junichiro Koizumi. Abe appears to prefer stability to reform, which may make for durable government but which makes economic transformation less likely.

If Abe’s popularity has in fact peaked, it is even less likely that he will be able to deliver the long-term economic revitalisation he has promised. Instead, as his political capital declines—and as his government prepares for local elections in April 2015 and legislative elections sometime in 2016—he may be tempted to pursue politically expedient policies rather than difficult but necessary reforms. This logic may guide the prime minister’s decision to devote the forthcoming extraordinary session of the Diet to revitalising uncompetitive rural regions, which could potentially bear fruit in next year’s nationwide local elections.

But if Abe shrinks from the challenge of structural reform, it raises an uncomfortable question about whether Japan’s economy can be reformed at all. If a prime minister with historically high levels of public support, command of both houses of the Diet and the approval of foreign investors and international organisations cannot prosecute anything more than incremental changes to long-standing economic institutions, can anyone?

Tobias Harris is an analyst at Teneo Intelligence, the political risk arm of strategic consultancy Teneo.

A longer version of this article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes’‘.

Categories: Forum

Asian cooperation hanging on a handshake

East Asia Forum - Sun, 10/26/2014 - 18:00

Author: Peter Drysdale, East Asia Forum

The APEC summit is just over a week away and all stops are out in Beijing to make it an economic and diplomatic triumph, despite the huge underlying challenges in managing China’s relations with the region. The primary goals and foundations of APEC are economic — delivering on Asia’s economic development ambitions within the framework of the rules-based global economic system.

But, at its fundaments, APEC is a political construct, committed to those cooperative goals in concert, including with North America. So it’s not surprising that, once elevated to a leader’s level summit, APEC has served on the side to sort out political and diplomatic issues among its members — it provided the first venue for a meeting between a Chinese and US president after Tiananmen; it brought China and Taiwan together routinely before relations developed under their new framework; and it served as a vehicle to sort issues between Australia and Indonesia over the troubles in East Timor, for example.

This year there is intense focus on the APEC opportunity to begin to fix the political relationship between China and Japan, or more particularly the terms that might enable a handshake between the Chinese and Japanese leaders to take the first steps.

There are a number of issues that play into the current tensions between China and Japan.

The first has to do with the baggage of history. There will have to be understandings on how to manage the Yasukuni shrine and the other history issues that offend China and Japan’s other Northeast Asian neighbours if there is to be a beginning.

The second has to do with territorial disputes which, Sourabh Gupta says in this week’s lead essay, dominate manoeuvring around the upcoming meeting between the Chinese president and Japanese prime minister. At this point, Gupta says, both Japan and China need to agree on political restraint and moderation to avoid further conflict and assume responsibilities to reassert maintenance of the status quo.

‘The East China Sea has historically been a sea of peace, cooperation and commerce as ideas and goods have regularly crossed its shore’, writes Gupta. ‘In 2008 the then leaders, Hu and Fukuda, sought to restore the sea and the wider China–Japan relationship — which had been damaged by Koizumi’s repeated visits as prime minister to Yasukuni Shrine — to this historical norm. Setting the politically sensitive issue of maritime delimitation in the East China Sea aside, the two leaders agreed to jointly develop the sea’s bounty in overlapping zones without prejudice to their respective sovereign rights and jurisdiction claims. Rather than focusing on the sovereignty dispute itself, Beijing and Tokyo should concentrate on the opportunities arising from the islands’ sovereign rights and jurisdiction by jointly prospecting for oil and gas in seabed areas in the islands’ vicinity’.

There is a third important issue, one that is unstated but at the crux of the current diplomatic stoushes between the two countries.

The past two decades have seen huge changes in the scale and pace of global economic growth, driven importantly by what has been happening in Asia. The change in scale and structure of the Asian economy since Japan and Australia together helped frame the first institution for trans-regional cooperation — APEC — has been enormous. New players like China and India have changed the shape of regional economic and political affairs and the region’s growth has defined what many now call the Asian century.

Asia’s economic success has changed its place in the world and how it’s now perceived in global economic as well as political affairs. Old conceptions of the regional economic order are outmoded and Australia, Japan, China, South Korea, and Indonesia all have to re-think their place in the region and how the region relates to the global economic system. This is a process on which we all have been somewhat reluctant to embark, in part because there was a lack of comprehension of the speed and enormity of the changes as they unfolded, and also in part I fear because old dreams are difficult to let go and limit the imagining of designs and strategies that attend to the future beyond ideas that are rooted in the past.

Japan, of course, was the leading edge of Asia’s trade and industrial transformation but the other countries in Northeast Asia, ASEAN, China and India signed on. The 1980s and 1990s were the heyday of Asia’s first and second waves of golden growth. These were the days when Japan was at the centre of regional trade and economic growth. Asia was turbo-charged, with growth of around 7 or 8 per cent a year, lifting its share in global output and trade. Japan was number two in the world economy, edging up briefly on number one.

Perhaps no country’s geo-political and economic position in the region has changed more dramatically than Japan’s since the 1980s. And it is still not clear that policy-making or thinking has caught up with these new circumstances. At that time, Japan’s conception of its leadership role and its vision for the region — a role and a vision of region-wide economic dynamism, with expanding frontiers stretching from its Northeast Asian neighbours through Southeast Asia and, of course, into China — comprehended both Asianism and internationalism. Times have changed. Japan, for example, now has South Korea as a major competitor and threat to many of its prized and symbolic brands globally. South Korea also challenges Japan’s former position in Asia as a dynamic player in regional and global affairs. The economic ascendancy of China and the emergence of India both mean that Japan’s position in the region is very different from what it was at the beginning of the 1990s.

These new geo-political and economic circumstances require a fundamental re-conception of how we all must manage our national economic policy agendas and foreign economic diplomacy, including the approach to regional economic cooperation.

Failure to accept and to integrate these circumstances into the framing of policy and to set national priorities accordingly is bound to leave us on the back foot in realising both Asia’s economic and political potential in this new international environment — with a dynamic China–Japan relationship as one of its central poles.

Peter Drysdale is Editor of the East Asia Forum.

Categories: Forum

China–Japan relations: creating a ‘sea of peace, cooperation and friendship’

East Asia Forum - Sun, 10/26/2014 - 04:00

Author: Sourabh Gupta, Samuels International

Tensions in the East China Sea over the contested Senkaku/Diaoyu islands dominate manoeuvring around the upcoming meeting between Chinese president Xi Jinping and Japanese prime minister Shinzo Abe at the APEC summit.

Earlier this year, in response to Beijing’s assertive policy stance following the Noda government’s September 2012 nationalisation of the islands, the Abe cabinet granted the Self-Defense Forces (SDF) wider latitude to repel a so-called ‘grey zone’ infringement — an infringement on the Senkaku/Diaoyu islands that does not amount to a full-blown armed attack. The reinterpretation of Article 9 of the Japanese constitution (the ‘peace clause’) further allows the SDF to provide logistics support that is ‘integrated with the use of force’ to the US military in all but the most extreme combat locations. Implementing legislation to give effect to these changes is expected to clear the Diet in the months ahead.

The revised US–Japan Defense Guidelines, which are expected to be released in 2015, will operationally integrate the provision of SDF support to US forces in case of an emergency in the East China Sea. Joint plans to enable the US to assist the SDF in repelling a ‘grey zone’ infringement are also expected to be finalised.

Political pathways to conflict management are seemingly at a dead end. To seek a solution based on international law, as former prime minister Noda’s foreign minister fleetingly floated, also seems hopelessly unrealistic. Beijing does not currently submit to the compulsory jurisdiction of the International Court of Justice and cannot be summoned to the Hague against its will. For Tokyo, as administrator of the islands, to press a case would be an acknowledgement of the less-than-final status of the Senkaku/Diaoyu islands.

At this juncture it is necessary for both Japan and China to individually practice political restraint and moderation to avoid further conflict. Both sides must assume important responsibilities so that the prevailing status quo can be maintained.

Beijing must desist from violating the airspace over the Senkakus/Diaoyus as part of its Air Defence Identification Zone patrols over these waters. It should ensure that its coast guard neither conducts boarding operations in the territorial sea of the Senkakus/Diaoyus nor launches helicopters in the islets’ proximity. Inflammatory actions at sea — like the instances of training fire-control radar on a Japanese Maritime Self-Defense Force destroyer and helicopter in January 2013 — are also incompatible with maintaining the status quo.

Tokyo must maintain its present policy of ‘not entering, not researching and not constructing’ on and around the islands for the time being. It should ensure that activities, such as constructing a port of refuge for fishing boats, upgrading the islands’ lighthouse or deploying civil servants to manage and preserve the islands’ forestry endowment or survey its marine resources, are deferred until Japan–China relations heal. Provocative activities such as stationing Self-Defense Force members around the clock on the Senkaku/Diaoyu islands would also escalate tensions.

Once a period of political quiet in the surrounding waters and in the larger (post-Abe) Sino–Japanese diplomatic relationship takes firmer hold, practical and creative ways of cooperation to achieve win-win outcomes on both sides can be contemplated. Tokyo could acknowledge — without prejudicing its legal claim — that an explicable Chinese claim to the Senkakus/Diaoyus exists and, bearing in mind that the stability of the surrounding area is of mutual concern to both countries, resolve to maintain the existing status quo on the islands indeterminately.

Beijing would express its appreciation for this acknowledgement, resolve not to disturb the status quo or peace and stability in the area surrounding the islands and, to the extent that the status quo remains undisturbed, renounce the use of force to alter the administrative control of the islands. Gradually, China’s maritime law enforcement assertions in the territorial sea of the Senkakus/Diaoyus could be withdrawn and the situation would operationally revert to the status quo ante as existed prior to the purchase of the three islands. No scope for joint administration of the Senkaku/Diayou islands is likely to be admitted.

Correspondingly, Japan could remain committed to the absolute maintenance of the status quo on the islands, and any and all measures that reinforce its effective control — such as conducting lighthouse repairs, pier and shelter construction, and temporarily deploying personnel on the islands — could be informally vetted in advance with China. With the passage of time, detailed fishing rules in these disputed waters can be consensually arrived upon and negotiations towards a maritime communication mechanism or hotline, as a confidence-building measure, could follow.

The East China Sea has historically been a sea of peace, cooperation and commerce as ideas and goods have regularly crossed its shores. In 2008 the then leaders, Hu and Fukuda, sought to restore the sea and the wider China–Japan relationship — which had been damaged by Koizumi’s repeated visits as prime minister to Yasukuni Shrine — to this historical norm. Setting the politically sensitive issue of maritime delimitation in the East China Sea aside, the two leaders agreed to jointly develop the sea’s bounty in overlapping zones without prejudice to their respective sovereign rights and jurisdiction claims.

Rather than focusing on the sovereignty dispute itself, Beijing and Tokyo should concentrate on the opportunities arising from the islands’ sovereign rights and jurisdiction by jointly prospecting for oil and gas in seabed areas in the islands’ vicinity.

Indefinitely shelving the Senkaku/Diaoyu islands ownership issue, while jointly formulating win-win economic and political arrangements, would be in line with this cooperative spirit that has underwritten peace, prosperity and stability in East Asia for extended periods of time. The East China Sea would be transformed into a ‘sea of peace, cooperation and friendship’.

Sourabh Gupta is a Senior Research Associate at Samuels International Associates, Inc., Washington.

A longer version of this article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes’‘.

Categories: Forum

New rules for China’s war on terror?

East Asia Forum - Sat, 10/25/2014 - 04:00

Author: Kendrick Kuo, Johns Hopkins

After a very violent year, officials in China’s western province of Xinjiang announced in March 2014 that they were considering an anti-terror law for the region. The law would ostensibly fill the gaps in the national criminal law by addressing the unique challenges of terrorism. But do laws really matter in an authoritarian state and in a region as militarised as Xinjiang?

The 1997 Criminal Law was the first legal recognition — albeit rudimentary — of terrorist crimes, listing them among other crimes that endanger public security. After the 9/11 terrorist attacks against the United States, China amended the law to include punishment for financial supporters of terrorism and harsher punishment for acts of terror. Yet the legal definition of ‘terrorism’, ‘terrorist organisation’, and ‘terrorist crime’ remained obscure, thus allowing broader interpretations to include a variety of groups. As if highlighting this ambiguity, Xinjiang Party Chief Wang Lequan in December 2001 described staging riots and beating, smashing and looting as terrorist activities.

The Criminal Law is only one part of a complex network of overlapping security-related legislation that form China’s legal approach to national security, all of which have implications for China’s war on terror. The State Security Law, adopted in 1993, parallels the Criminal Law, but focuses on collusion with foreigners to organise and carry out espionage, separatist conspiracies and terrorist activities — it was invoked earlier this year to prevent Uyghur professor Ilham Tohti from accessing his lawyer. Legal ambiguity pervades the entire apparatus of national security laws, as there is no legislation tailored to addressing terrorism.

Since the Kunming attack in March 2014, the Chinese public has become more aware of the limits of the criminal law provisions to support anti-terror efforts. Beijing faces mounting pressure for legislation tailored to handle attacks. The complexity of terrorism issues ensures that a national anti-terror law will take years to achieve. The announcement that Xinjiang was going to draft a regional law came with the qualifier that this was only the first step in a multiyear process of getting legislation passed.

China still lacks national anti-terror legislation, but Beijing has taken steps to remove legal ambiguity. In 2011, the Standing Committee of the National People’s Congress passed the Decision on Issues Related to Strengthening Anti-Terrorism Work, which described terrorist activity as ‘activities that severely endanger society that have the goal of creating terror in society, endangering public security, or threatening state organs and international organisations’. The decision also defined terrorist organisations and terrorists and explained the procedure for listing them.

While human rights organisations may see legal ambiguity surrounding counterterrorism as a boon to a Chinese regime intent on maintaining stability at all costs, Beijing may actually view it as an obstacle to legitimacy and to effective counterterrorism, undermining Beijing’s long-term project of ‘legalisation’.

Rather than just defending the Communist Party’s claim to the rule of law, national security laws can be instrumental in winning support for an expanded scope of state authority. China adopted the 1996 Martial Law in response to criticism of the decision in 1989 to declare martial law. The legislation allows the government to declare martial law and suspend a number of legal rights to restore order. It would be put to the test if the situation in Xinjiang deteriorates.

After the spate of attacks earlier this year, including the Kunming and Urumqi station attacks, the Higher People’s Court of Xinjiang executed 13 people on terrorism charges. Others received delayed death penalties and lengthy prison terms. The aftermath of terror attacks in China, though not given much media attention in the United States, is an important part of Beijing’s strategy. The announcement of indictments and punishments are important for China’s push for political legitimacy through rule of law. Authorities in Xinjiang have also used sentencing rallies, where mass trials are conducted with thousands in the audience. In May 2014, 55 people were sentenced on charges of terrorism, separatism and murder. While this model of mass sentencing is undoubtedly a show of force and political theatre, there is also an element of demonstrating the law at work.

Political legitimacy is not the only reason for the passing and implementing of improved national security laws. Broad and ambiguous laws may allow for abuse under the guise of legality, but they also limit the effectiveness of security personnel. Since Chinese criminal law does not offer specific regulations on terrorism, terrorist acts are treated under the category of ordinary crime where criminal liability is based on the type of criminal action as opposed to terrorist intent. For example, threatening the government with violence is not considered a terrorist crime under the criminal law. Chinese legal analysts thus see the lack of clear and precise terrorism-specific legislation as detrimental to national security.

Specific legislation that grants special authority in counterterrorist activities allows security personnel to supersede restrictions imposed by ordinary criminal cases. After the July 2009 incident in Urumqi, the National People’s Congress passed the People’s Armed Police Law, giving the People’s Armed Police greater authority to detain and investigate in order to handle riots, rebellions, terrorist attacks and other serious crimes. A national anti-terror law would potentially define responsibilities of different law enforcement agencies and also procedures for activating emergency measures.

Decentralisation of authority has also been an obstacle for effective, coordinated counterterrorism. Domestically, this concern was reflected recently in Xinjiang party chief Zhang Chunxian’s announcement that ‘we will properly conduct our work in Xinjiang under the leadership of the National Security Commission’. The simultaneous push for rule of law and the elevation of Xi Jinping as a visionary and charismatic leader are reconciled in the more encompassing drive to recentralise authority. The rule of law is another instrument to ensure that decisions made in Beijing are executed properly.

In this way China’s war on terror is likely to be disciplined and so accrue legitimacy. It will also, importantly, be effective.

Kendrick Kuo is a China specialist pursuing graduate studies at the Johns Hopkins School of Advanced International Studies.

Categories: Forum

No good time for Xanana Gusmão to let go

East Asia Forum - Fri, 10/24/2014 - 16:00

Author: Damien Kingsbury, Deakin University

Timor-Leste’s prime minister, Xanana Gusmão, has deferred his decision to step down as his country’s leader until April 2015. He had announced earlier this year that he intended to leave office firstly in September, then in October. He has since said that he wishes to stay on to oversee negotiations with Australia over a resolution to the Timor Sea dispute.

Timor-Leste has disputed the 2002 creation of a Joint Petroleum Development Area in the Timor Sea, and the adjacent boundaries, from which both Australia and Timor-Leste derive profits from oil extraction. Timor-Leste has argued in the Permanent Court of Arbitration in The Hague that the treaty, which was agreed to by Timor-Leste under pressure, should be invalidated as a result of Australia spying on the Timor-Leste negotiating team.

The court was due to hand down a determination on the matter in September, but in August both parties agreed to work outside the judicial system to seek a negotiated outcome. In September, Gusmão said that he could not ‘run away’ from his leadership role while the negotiations were underway.

Gusmão had been considering stepping down as prime minister to make way for a younger generation of Timor-Leste leadership since 2013, a year after his coalition government was re-elected. There have been calls in Timor-Leste for the ‘Generation of ’75’ leaders to step aside to make way for a younger generation of political leaders. Timor-Leste’s political leadership continues to be dominated by actors who were either military resistance leaders during the Indonesian occupation or who, from 1975, helped lead the struggle from abroad.

Gusmão has recognised that the next generation of leaders is unlikely to emerge while he remains as prime minister, such has been his dominance over Timor-Leste’s political life since before the country achieved independence in 2002. But, at 67 years old and having spent 17 years as a guerrilla fighter and leader and then seven years in an Indonesian prison, Gusmão is less robust than he once was, in particular suffering chronic and sometimes debilitating back pain.

While Gusmão was concerned to ensure a positive outcome for the Timor Sea negotiations, as well as a royalties dispute with oil company ConocoPhilips, this is only part of his reason for wanting to stay on as prime minister. The real negotiations with Australia and the oil companies are largely handled by Resources Minister Alfredo Pires and his team, so Gusmão’s presence is more symbolic than actual in that regard.

Another part of Gusmão’s thinking is that it is not yet clear who would — or could — succeed him as the country’s leader. Gusmão’s very able right-hand man and Chief of Cabinet, Agio Pereira, has been widely tipped to succeed Gusmão. However, Pereira is himself a member of the Generation of ’75, having fled to Australia where he was a key contact for the resistance movement.

More importantly though is that, having lived outside the country for so long, Pereira does not have either an established geographic or language group support base and, despite his undoubted competence, does not have a high public profile beyond Dili.

There are others in Gusmão’s party (the National Congress for Timorese Reconstruction) who could also succeed him, and who are younger, including party secretary-general Dionísio Babo Soares. But there is also a view that, without Gusmão’s leadership, in a country in which charisma counts for more than policy, the party — and the coalition government — could break up over a disputed leadership.

On the other side of the political fence, the Generation of ’75 leaders of Timor-Leste’s second largest party, Fretilin, especially Mari Alkatiri, do not look like leaving any time soon. This is despite Alkatiri having taken his party to successive election defeats.

Although he worked closely with Fretilin following the 2012 elections, Gusmão would be deeply reluctant to see Alkatiri again take the prime ministership, if it were this time by default.

Finally, while Timor-Leste’s oil fund has now reached US$15 billion, the government has been spending at a rate that, depending on future fiscal prudence, will see it run out of money some time over the next 10 to 20 years. While Gusmão cannot hope to be around to oversee that process, he may wish to see put in place more sustainable economic policies. He may also want to more fully address some of his people’s continuing problems with widespread poverty, poor education and high unemployment.

With his undoubted love for Timor-Leste’s people and at least one eye on his legacy, no time will be, to him, a good time to finally let go.

Categories: Forum

Taiwan’s Ten Thousand Double-Edged Swords

East Asia Forum - Fri, 10/24/2014 - 04:00

Author: Che-Yu Ou, Waseda University

Procuring the Ten Thousand Swords missile system is a blunder for Taiwan; it aggravates the security dilemma between it and the PRC. For its own security, Taiwan should deter threats from the PRC by manufacturing weapons with exclusively defensive capabilities.

The Ten Thousand Swords missile, or the ‘Wan Chien’ missile, is an aircraft-launched standoff missile that creates a barrage to destroy enemy facilities such as air bases, runways and missile launching sites. Its accuracy is enhanced by radars and GPS, with a striking range of 300 kilometres. Taiwan’s Ministry of National Defense has installed the missile in 40 Indigenous Defence Fighter (IDF) aircrafts to date and intends to complete installation on all 127 IDF aircraft by the end of 2016.

Recent People’s Liberation Army (PLA) modernisation efforts are formidable. Taiwanese forces seem frail and vulnerable against the stronger China. In 2014, China will spend approximately US$132 billion on its defence budget; a 12.2 per cent increase from the previous year. In contrast, Taiwan merely spends around US$10 billion on its defence and is not always able to procure the arms it favours from the United States.

Taiwan insists that the new system makes an important contribution to its security. The Ten Thousand Swords missile capability is considered strategically important because it enables Taiwanese aircrafts to hit targets in mainland China from the Taiwan Strait. Taiwanese aircrafts will no longer have to risk flying deep into Chinese airspace to hit key facilities and infrastructure.

But this does not reflect the realities of China’s thinking. The PRC aims to change Taiwan’s perception of its own security so that the island will forego any aspirations to declare independence. This includes the deployment of at least 1,600 short-range missiles as an intimidation tactic. The Ten Thousand Swords missile system is likely to compel China to further accelerate its military modernisation efforts. In a contingency scenario Beijing may aim to coerce Taipei into capitulation either before US military support arrives or by preventing US troops from accessing the vicinity of Taiwan. Taiwan’s decision to deploy the Ten Thousand Swords aggravates the security dilemma and undermines the security Taipei is trying to bolster.

The security dilemma — the situation where actions by one state intended to heighten its security lead other states to respond with similar measures, producing a spiral of increased tensions — has been a longstanding feature of Cross-Strait relations. Taiwan’s previous military procurement and acquisition choices often created tensions with the PRC and destabilised regional security. In response to the increased number of PLA fighter jets and missiles deployed close to its territory, Taipei has vigorously strived to strengthen its security. In May 2000, the Chung Shan Institute of Science and Technology, a military-owned research organisation in Taiwan, launched a missile project aimed at disabling Chinese military units. With similar intent, the Ten Thousand Swords missile was developed to surpass the AGM-154 air-to-surface glide missile which the United States refused to offer Taipei. As such, Taipei believes that by acquiring the capability to shell key PLA facilities, it can bolster deterrence by denial.

Taiwan’s belief is ill-founded. The deployment of the Ten Thousand Swords missiles increases the chances of Taiwan being struck first. The missiles are capable of reaching farther into PRC territory than other missiles Taiwan currently possesses. But the extended radius, coupled with the offensive capability, will give China added incentive to strike first in the case of war. To ensure the mobility of PLA aircraft, China’s Second Artillery would be likely to initiate a strike to neutralise Taiwan’s air bases. China also has the capability to deploy additional missiles from other regions to the coast of Fujian and inflict a severe bombardment on Taiwan. As a result, China’s artillery forces have the capability to pre-empt any Taiwanese IDF missile strikes.

At the politico-strategic level, the missile empowers Taiwan’s de facto independence. Predictably, Beijing will perceive the acquisition of these missiles as a threat to its unification efforts. Although President Ma Ying-jeou alleviated tensions by reiterating the ‘three no’s’ — no independence, no unification, and no use of force — the procurement of these missiles, which can theoretically be used for offensives purposes, is likely to stoke Beijing’s scepticism towards Ma’s commitment to ease Cross-Strait tensions. As such Beijing may increase its efforts to prevent Taiwan acquiring further arms in the future.

To avoid cataclysm, Taiwan should focus its efforts of defensive weapons systems. Beijing will interpret Taipei’s procurement of offensive capabilities as a move towards secession from the mainland and this will increase the likelihood of war. An exclusively defensive approach to security will help to alleviate tensions, create an exit from the vicious circle of the security dilemma, and decrease the possibility of war in the Taiwan Strait.

Che-Yu Ou is a graduate student at Waseda University, Japan. He previously attained a BA in Economics from University of Victoria, Canada. 

Categories: Forum

Infrastructure spending is the medicine Thailand’s insecure economy really needs

East Asia Forum - Thu, 10/23/2014 - 16:00

Authors: Pisit Leeahtam, Chiang Mai University & Cynn Treesraptanagul, Chiang Mai

In May 2014, the Thai army, known as the National Council for Peace and Order (NCPO) staged a coup d’état to prevent civil war breaking out after months of political deadlock and administrative paralysis. Since then, the interim constitution has been enacted, the new cabinet has received royal endorsement, and the National Legislative Assembly and the National Reform Council have been established. The NCPO has asked to stay in power for one to two years to restore stability. While Thailand’s national reform has so far been on schedule on the political front, the Prayuth government now confronts another serious challenge as it faces pressure to revive Thailand’s struggling economy.

Before the coup, GDP growth contracted 0.6 per cent year-on-year for the first half of 2014, almost entering technical recession. Consumer confidence was at its lowest in April and the household debt-to-GDP ratio was as high as 82 per cent. The NCPO responded quickly after the coup, repaying rice farmers for their crops sold during the previous government and ordering speedy disbursement of compensation. Consumer confidence gradually picked up and reached a one year high in September thanks to the greater political clarity.

It’s not all good news, though. August imports plunged 14.2 per cent year-on-year. The decline was broad-based, led by fuel, machinery, automobile parts and consumer goods. This shows that investment is still lacklustre while domestic demand remains weak. The manufacturing production index and capacity utilisation have yet to pick up. Tourism remains sluggish due to the continued imposition of martial law. The export sector, which accounts for 74 per cent of GDP, continues to be a drag on the recovery of the Thai economy. August exports fell 7.4 per cent year-on-year. Demand from Europe and Japan, Thailand’s third and fourth major export destinations representing 9.81 per cent and 9.72 per cent of total exports respectively, remains weak.

By the end of 2014, Thailand will no longer be eligible to benefit from Generalised System of Preferences (GSP) privileges with the EU since it is now considered an upper-middle income country. As a result, Thai exports will lose competitiveness to countries that still receive GSP privileges such as India, Vietnam, Indonesia and the Philippines, or to countries without GSP privileges but with FTAs with the EU such as Malaysia, as well as to a more competitive China. Despite Thailand resuming negotiations on a FTA with the EU, the process won’t be completed until 2017 at the earliest, and ratification will only take place when Thailand has a newly elected government.

Timely government spending is vital. The country’s inflation has been subdued and public debt is currently at 45.7 per cent of GDP, thus leaving room for stimulus. Recently, the government announced a 364 billion baht (approximately US$11.2 billion) fiscal stimulus package for the fourth quarter of 2014 to create jobs and help rice farmers. The package covers delayed investment projects from the 2014 financial year, public facilities repair, refurbishing and anti-flood maintenance projects and a one-off payment to farmers. It is expected that revived government expenditure will boost sentiment and eventually lead to stronger business investments. At the same time, the government has expedited approvals of many projects that applied for the Board of Investment’s investment promotion privileges and concessions. Since the coup, projects worth 458.59 billion baht (US$14.1 billion) have been approved out of the 700 billion baht (US$21.6 billion) worth of projects awaiting approval.

Since Thailand is currently undergoing national reform, public spending should be geared towards repositioning the country’s economic fundamentals while honouring long-term fiscal stability. Infrastructure improvement is a must for Thailand to fully benefit from its geographical advantage at the heart of ASEAN. The NCPO made moves in the right direction when it approved a 2.4 trillion baht (US$73.9 billion) infrastructure development plan. The plan includes projects to improve the highway and water transport networks and Thailand’s air transport competitiveness, as well as a 127 billion baht (US$3.9 billion) project to construct six dual-track rail lines with a combined length of 887 kilometres. To deal with the upcoming integration with the ASEAN Economic Community, Thailand also needs to address supply-side challenges to increase competitiveness. For example, the agricultural sector should embrace integrated crop and harvest planning and improve post-harvest management to reduce reliance on government subsidies and create value-added products.

The Prayuth government has on its shoulders the public’s high expectations to carry out reforms that cannot be done under normal elected governments. Some government policies have a clear direction whereas some policies require further public debate. Whether the government will be successful in restoring growth and introducing reform within the expected time frame and amid increasing movement from Thaksin’s camp remains to be seen.

Dr Pisit Leeahtam is Dean of the Faculty of Economics at Chiang Mai University. Cynn Treesraptanagul is Dr Leeahtam’s research assistant.

Categories: Forum

Renminbi stepping in right direction toward internationalisation

East Asia Forum - Thu, 10/23/2014 - 04:00

Author: Thierry de Longuemar, ADB

Over the past several decades, we have seen how China’s high economic growth and increasing economic integration with other countries have led to a dramatic increase in its clout in global output and trade.

Just look at the facts. China is now the world’s second largest economy, accounting for 12 per cent of global gross domestic product in 2013. It is also the world’s largest exporter and second largest importer, accounting for about 12 per cent of world trade in 2013. Attracting more than US$110 billion in FDI in 2013, the PRC is the world’s largest developing-country recipient of FDI inflows. It is also the world’s largest holder of foreign exchange reserves, with a total of US$3.8 trillion in reserves at the end of 2013.

The PRC may be a globally significant economic and trading power, but the market share of its currency, the renminbi (RMB), lags well behind the US dollar and the euro.

To align the RMB with its growing global stature, the PRC has embarked on a strategy to internationalise the RMB. Typically, it is taking a gradual approach. In this, it has embarked on a number of initiatives designed to encourage the wider use of the RMB and raise its status in the international monetary system.

These measures include allowing foreign investors access to domestic capital markets, through programs like the Qualified Foreign Institutional Investor and the RMB Qualified Foreign Institutional Investor. It has also increased flexibility of the exchange rate — the RMB trading band has been widened to plus or minus 2 per cent. Also, through the use of RMB as a settlement currency for cross-border trades, the PRC has been gradually expanding the use of RMB in bilateral trade settlement agreements.

There are other steps being taken, such as the development of RMB deposit accounts and the opening of the offshore RMB market. The PRC has also opened offshore RMB centres, such as in Hong Kong, Singapore and London.

The result has been the emergence of the RMB in the international monetary system. For example, the RMB is beginning to play a role in international trade transactions. In December 2013, the RMB overtook the euro to become the second most used currency in global trade finance after the US dollar. China’s international trade has also grown at a compound annual growth rate of 19.1 per cent between 2001 and 2013.

The rapid expansion of RMB trade settlement together with other policy and regulatory steps have bolstered the growth of the RMB bond market in Hong Kong (also known as the dim sum bond market). From only 10 billion yuan (US$1.6 billion) in 2007 — the year when the first dim sum bond was issued — RMB-denominated bond issuance in Hong Kong significantly increased, to 372.1 billion yuan ($60.7 billion) in 2013. In the first three months of 2014, bond issuance reached 338.8 billion yuan ($55.2 billion).

The number of bond issuances has likewise climbed steeply from just 5 in 2007 to 891 in 2012 and 1,160 in 2013, while the number of bond issuers increased from just 3 in 2007 to 132 in 2013. From January through May 2014, 890 bonds were issued by 107 issuers.

While the bulk of RMB bond issuances still originate from companies based in the PRC and Hong Kong, issuances from other economies have also grown through the years. In 2010, issuances by firms outside PRC and Hong Kong accounted for only 5.4 billion yuan ($880 million). By 2013, their RMB bond issuances amounted to 76.1 billion yuan ($12.4 billion). As a share of total RMB bond issuance, their share has varied from about 13–35 per cent.

Trade settlements have contributed to the rise of the RMB as a global currency. According to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the RMB only had a 0.31 per cent share in world currency payments in 2011. In March 2014, however, its share had increased to 1.62 per cent. The RMB’s ranking in world currency payments has also increased. In October 2011, it was ranked 17th in terms of usage but by March 2014, its ranking had shifted to 7th position. Indeed, the RMB is gaining on the Canadian dollar (which held a share of 1.83 per cent, ranking 6th) and the Australian dollar (with a share of 1.84 per cent and 5th in rank).

So while good progress has been made, there is plenty of work still to be done. Trade settlements and bond issuance have increased, but from a low base. There have been some relaxation in restrictions on capital flows, but the capital account is still largely controlled. The exchange rate is still controlled.

There is a positive trend in RMB as a reserve holding, but it is still small compared to other global currencies. Financial markets are still not as deep and liquid as those in developed countries, and are much less than those with global currencies. While the accomplishment is impressive, the RMB is still far from being a full-fledged international currency.

The PRC is moving in the right direction with these measures and producing positive results. But these developments with the RMB are more a result of the PRC opening up its capital account and deepening its financial markets rather than the pursuit of specific policy goals. All these trends will develop a critical mass over time and have the potential to start transforming the global monetary system.

Thierry de Longuemar is the Vice President (Finance and Risk Management) of the Asian Development Bank.

This article was originally published here at the Asian Development Blog, the blog of the Asian Development Bank, on 15 September.

Categories: Forum

Looking for a plus-one, Japan turns to Vietnam

East Asia Forum - Wed, 10/22/2014 - 16:00

Author: Kensuke Yanagida, Japan Institute of International Affairs

As Japan seeks to diversify its investments beyond China, an opportunity arises for Vietnam to attract greater international investment.

Over the past few years, firms invested in China have started diversifying their investment destinations and reducing their overreliance on China, in what is called the ‘China Plus One Strategy’. This is a result of rising labour costs and ongoing structural reforms in China. In this context, Vietnam appears to have great potential for attracting the interest of foreign firms looking for a destination for their next investment — to become the ‘plus one’. Vietnam is blessed with a young and highly-educated workforce, a sizeable domestic market and geographical advantages. If Vietnam could create the right conditions it could achieve what newly industrialising economies and China have in terms of greater economic development.

In recent years, Japanese firms have been more actively pursuing the ‘China Plus One Strategy’. While the inflow of Japanese FDI into China dropped in 2013, inflows into ASEAN have been increasing over the last decade — now annual Japanese FDI inflows into ASEAN exceed investment in China. According to a survey conducted by the Japan Bank for International Cooperation in 2013, China lost its top place for the first time as a promising destination for investment as perceived by Japanese firms. The top destination is now Indonesia — followed by India, Thailand, China and Vietnam. But this does not necessarily mean that Japanese firms are withdrawing from China: they are simply seeking out new investment destinations while continuing to uncover market opportunities in China.

Vietnam is one of the more favoured destinations for Japanese outward investment. The volume of Japanese investment in Vietnam has been rapidly increasing, particularly since the Japan–Vietnam Economic Partnership Agreement came into effect in 2009. The industries in which Japan invests the most are transportation equipment and electric machinery for the manufacturing sector. Vietnam is the world’s fourth largest market for motorcycles, so Japanese auto makers such as Honda and Yamaha as well as parts and components suppliers have been investing as well. Japanese electronics companies have also increased their investments, partly due to Samsung establishing a mobile phone factory to produce the Galaxy smartphone series. Panasonic is seeking market opportunities for home electric appliances and regards Vietnam as an important part of a broader emerging markets bloc. As for non-manufacturing sectors, significant investments have been made in the financial and insurance industries.

As Vietnam strives to create a stable and conducive environment for foreign investment, certain obstacles stand in the way. These include a lack of supporting industries, inadequate infrastructure, unstable macroeconomic conditions and a lack of transparency in regulatory and legal systems. Among these challenges, the lack of supporting industries and unstable macroeconomic conditions are closely interconnected. Vietnam has followed the typical pattern of East Asian production by engaging in intra-regional trade in primary and intermediate goods and exporting final goods to advanced markets. But exporting firms in Vietnam are mostly foreign companies that procure their raw materials and intermediate goods from abroad. There is little value-chain integration between large exporting firms and domestic supplier firms. As a result, Vietnam’s increased manufacturing exports do not contribute much to alleviating the current account deficit. Nurturing competitive domestic suppliers is therefore a key challenge facing Vietnam.

Japanese small and medium enterprises (SMEs) seeking business opportunities abroad could find themselves in win-win relationships with Vietnam. Japanese SMEs face various challenges in the domestic business environment: shrinking domestic markets due to an ageing population, large firms that contract with SMEs shifting overseas, and increasing competition with emerging foreign companies, to name a few. After the global financial crisis in 2008, Japanese SMEs accelerated their migration abroad to survive.

Vietnam should promote measures to accommodate these SMEs from Japan. Vietnam could benefit from the technological diffusion brought by Japanese FDI. Japanese SMEs are already looking to Vietnam. One such initiative is the Kansai Supporting Industry Complex built in the Long Duc Industrial Park in Dong Nai Province in 2013. The complex is designed to support and facilitate the establishment of foreign subsidiaries by SMEs from the Kansai region in Western Japan. Vietnam’s successful accommodation of Japanese investment will help domestic supporting industries grow and, in turn, Japanese SMEs will be able to enjoy local partnerships and access to local markets.

Both Japan and Vietnam are also involved in the Trans-Pacific Partnership (TPP) negotiations. When concluded, the TPP will help promote trade and investment, and it will also compel domestic economic and industrial structural changes. This will be difficult, particularly for developing countries like Vietnam that will need a process for strategically upgrading their industrial base.

In this context, Japan and Vietnam will be important partners. Both countries would benefit from closer economic relations and greater cooperation.

Kensuke Yanagida is Research Fellow at the Japan Institute of International Affairs, Tokyo.

Categories: Forum

Business as usual in post-election Suva?

East Asia Forum - Wed, 10/22/2014 - 04:00

Author: Nicole George, UQ

Fiji’s new parliament, led by Commodore Voreqe (Frank) Bainimarama, was sworn in on 6 October. In 2006, Bainimarama led the military coup that rendered the parliament inactive for eight years. Back then, Bainimarama promised that Fiji would return to electoral democracy, but not to the allegedly corrupt and ethnically discriminatory governance practices of the past. Rather, the new post-coup government would work to undo the relationship between the church, the state and indigenous customary authority, which has shaped Fiji’s political landscape since the country achieved independence.

Historically, debates on governance have regularly focused on recognition of indigenous paramountcy (for example in land management policy or in political and economic participation) or the legitimacy of declaring Fiji a Christian state. Racial divisions between the country’s Fijian and Indo-Fijian populations have become sharply politicised as a result. Bainimarama’s election win now suggests he has a mandate to revoke these longstanding principles.

Fiji waited many years for the promised elections and in the meantime lived with government by decree. These decrees included a suite of restrictive media decrees which have attracted wide regional criticism, but also large public spending programs improving public and village infrastructure, and more progressive decrees calling for a ‘zero tolerance’ approach to violence against women.

Even these progressive ‘achievements’ have not been without criticism. The government’s infrastructure projects have been subsidised by Chinese ‘soft loans’, which have increased as a result of Fiji’s Look North policy and its eagerness to build closer aid and development relationships with China. But China’s loans are said to come with high interest rates and on the condition that Fiji import Chinese materials and labour. Critics say these infrastructure projects have done little to build local business and employment opportunities.

Critics have also scrutinised government programs on women’s advancement. Shamima Ali from the Fiji Women’s Crisis Centre claimed that the way the zero tolerance decrees were implemented downplays state responsibilities to protect women from violence. Instead, they encourage women to reconcile with violent family members, and uphold the sanctity of marriage and the family. Christian and cultural norms continue to pervade the policing of gendered ‘crimes’ in post-coup Fiji, despite government rhetoric on the importance of breaking the link between church, customary authority and the state.

But these critical views were not reflected in the results of Fiji’s general elections on 17 September. Fiji First, Bainimarama’s party, won 32 seats in the 50 seat national assembly. This is a sizeable majority, but not the landslide some had predicted. The Social Democratic Liberal Party, led by Ro Teimumu Kepa, won 15 parliamentary seats. Their slogan, ‘Reclaim Fiji’, reflects a commitment to protect indigenous paramountcy, although this policy platform has been dismissed as regressive by Fiji First.

The opposition ranks also include three representatives of the National Federation Party, including former vice president of the Fiji Law Society, Tupou Draunidalo, and former University of the South Pacific Dean and Professor of Economics, Biman Prasad. These representatives will contribute to the opposition presence in the parliament and ensure that the government does not have things all its own way.

But even if Bainimarama’s ‘revolution’, as he terms his challenge to ‘race politics’, seems mandated by popular vote there is good grounds for questioning how far the promise of revolutionary change will be fulfilled.

The pervasive presence of military authority in the country seems unlikely to recede. At least six members of Fiji First are ex-military officers and many senior officials in the public service have been seconded from the military. The authoritarianism that has been a default response to the management of ‘dissidence’ inside the country is likely to continue. In the two weeks following the election, state security force brutality has again been in the spotlight, with members of the Fiji Police Force allegedly perpetrating extra-judicial violence against a retired school teacher.

On gender there is evidence of some concrete gains for women but also subtle indicators of policy backsliding. Eight women won seats in the new parliament, the opposition leader is a woman and all female members elected to the government benches have been allocated ministerial responsibilities. Dr Jiko Luveni, former Minister for Women, was elected unopposed to the position of Parliamentary Speaker. This is the first time a woman has held this role in Fiji. These are notable achievements in a region where women’s representation in institutional decision-making hovers under 4 per cent.

On taking up her new role in the parliament, Luveni expressed a hope that her example would inspire other women to follow a political career. But she, too, has been criticised for voicing opinions which reflect conservative ideas about appropriate conduct and dress codes for women. Under Luveni’s watch, conservative religious and cultural protocols continued to shape state policing responses to gender crimes and cases of violence against women. This is little reason to suppose this will change under the new government.

The challenge for the government will be to match its progressive policy rhetoric with positive tangible outcomes achieved through genuine political engagement. Despite his majority, many people did not vote for Bainimarama. For them his revolution is an imposed one. A continuation of the authoritarianism of the past eight years will only enhance their sense of ‘business as usual’.

Nicole George is a lecturer in Peace and Conflict Studies in the School of Political Science and International Studies at the University of Queensland.

Categories: Forum

Why ‘womenomics’ is the way forward for Japan

East Asia Forum - Tue, 10/21/2014 - 16:00

Author: Naohiro Yashiro, International Christian University

‘Womenomics’ is a key pillar of Prime Minister Shinzo Abe’s economic growth strategy. In 2013, just 64 per cent of Japanese women aged 15–64 were participating in the labour force — a low rate by OECD standards. As Japan’s labour force is already in decline, it is wasteful that women, and particularly those who have a higher education, have been underutilised. To address this, Abe has set a target to increase the ratio of female managers to over 30 per cent by 2020. In response, several large firms have set similar numerical targets.

But some are sceptical. As the ratio of female managers (including section chiefs) in Japanese firms was just 11 per cent in 2012, it will be difficult to triple this figure in eight years. If firms randomly increase the number of female managers regardless of their ability, this may be costly or discouraging to their male counterparts.

Why is raising the percentage of female managers so important for economic growth?

The current one-to-nine ratio between female and male managers indicates a serious misallocation of human resources, given that male and female management abilities do not differ. It is often said that the lack of female managers is not attributable to discrimination on an individual basis, but that there simply are not enough female candidates. But such logic depends on the nenko jyoretsu system, whereby seniority within the firm is largely determined by how long one has worked there rather than merit.

So current employment practices, such as women being forced into temporary or secretarial streams and out of work when they have children, have resulted in significant underutilisation of female human resources.

The extremely low female manager ratio is a result of outdated labour market practices. Seniority-based promotions used to be efficient when the industrial structure was dominated by the manufacturing industry. This is no longer the case, but the memory of Japan’s successful economic past has led to a strong inertia in Japanese firms. The older generation also has a vested interest in maintaining seniority-based wages.

Japanese employment practices are based on the need for multi-skill formation in the firm. Employees are frequently shifted from one job to another in the process of climbing up the occupational ladder to managerial positions. This is accompanied with on-the-job training, which is time consuming and, in the case of large firms, often means that an employee must relocate. Most Japanese employees have an implicit employment contract that guarantees long-term employment and seniority-based wages on the condition that employees are subject to the firm’s decision on what jobs they will do and where they will work. This employment style is a hangover from the social norm that husbands would earn money while wives would manage the household. Until the end of the 1980s most Japanese families followed this ‘social norm’. Today this model is still subsidised by the tax and social security system.

Current employment practices are a major obstacle for married women who wish to work full time. ‘Full-time work’ in Japan does not mean eight hours per day — it requires constant overtime. This practice has been an important means of adjusting down labour inputs during recessions in order to avoid lay-offs. But if both the husband and wife are working overtime, who will take care of the children? In this sense, under current employment practices, there is a trade-off between increasing women’s workplace participation and raising birth rates. In addition, when a firm orders either partner to relocate, families have to choose between family separation and one partner quitting their job. In most cases women leave their job.

A major factor behind the extremely low ratio of female managers in Japan is that it is necessary to stay in a particular firm for a long time to secure a promotion. The average length of female employment is shorter than that of their male counterparts, due mainly to women’s disproportional responsibility in the home. Thus if promotions were not based on seniority the gender disparity among managers would be smaller.

Whether or not a move away from seniority-based promotions is feasible depends on the type of skills required. If the necessary skills are firm-specific and can be formed only through on-the-job training, age-related promotion is inevitable. But if the necessary skills are general, or will easily become obsolete through information technology changes, seniority need not matter. Though general skills are becoming more prevalent as information and communication technologies develop, many Japanese firms still find it difficult to change traditional promotion practices.

Thus the easiest way to ‘achieve’ the target of 30 per cent female managers, and unfortunately what some firms are doing, is to create ‘nominal female managers with no authority’ while maintaining current employment practices. But the alternative would be better — discarding the current internal promotion system and recruiting qualified managers, either male or female, Japanese or foreign, from outside of the firm.

Abe’s 30 per cent female manager ratio is not a target for its own sake: it aims to transform Japanese employment practices to a more market-based system. This would entail promoting the principle of the same wage for the same job instead of the seniority based wages; establishing a compensation scheme for professional jobs that is independent of the length of working hours; and developing a tax and social security scheme that does not implicitly support a particular division of labour within the family. These policy targets can only be achieved through structural reform of Japanese labour markets.

Naohiro Yashiro is a visiting professor of economics at the International Christian University, Tokyo.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes”.

Categories: Forum

Balancing the short and long term in Indonesia fuel subsidy debate

East Asia Forum - Tue, 10/21/2014 - 03:46

Author: Keoni Indrabayu Marzuki, RSIS

Despite having won the president and vice-president posts respectively, Joko Widodo and Jusuf Kalla will possess little control, if at all, on the formulation of the next Indonesian budget for fiscal year 2015–16. One particular issue that concerns the new administration is the large portion of funds for energy subsidies, particularly fuel subsidies.

To ensure his administration would have more fiscal space to fund new government projects and minimise the budget deficit, President-elect Joko Widodo (Jokowi) asked outgoing president Susilo Bambang Yudhoyono to increase the price of subsidised fuel as his final policy gesture before stepping down. President Yudhoyono turned down the request on the grounds that increasing the price of subsidised fuel would increase the economic burden on the Indonesian people.

Amending the fuel subsidy budget would be an important step towards fuel subsidy reform. The government allocated 300 trillion rupiah (about US$25 billion) to energy subsidies in 2014. Around 80 per cent of the energy subsidy fund, or about 250 trillion rupiah, is spent on fuel subsidies alone. In his proposed 2015-16 budget, Yudhoyono allocated 290 trillion rupiah for fuel subsidies.

The new budget also forecasts a relatively large fiscal deficit: 2.32 per cent of GDP. Finance minister Chatib Basri estimated that by increasing the price of fuel and thereby reducing the subsidies, the government could reduce the deficit ratio to 1.32 per cent.

External influence such as the end of quantitative easing by the US Federal Reserve may negatively affect the rupiah in the coming months. The weakening of the currency would mean that the new administration would have to spend more to buy oil on the international market. Consequently, fuel subsidies may impose a severe burden on the budget.

Fuel subsidies are ineffective. They were initially intended to help the poor access affordable energy supplies. But as the economy grew, fuel subsidies benefited the middle and upper classes instead. The Ministry of Energy and Mineral Resources estimated that around 70 per cent of subsidised fuel is consumed by the middle and upper classes.

Fuel subsidies also hinder much-needed infrastructure development. As fuel subsidies consume about 20 per cent of the state budget, it constrains the remaining fiscal allocation for infrastructure development. Consequently, Indonesia still suffers from basic infrastructure deficiencies in numerous public sectors, including clean water, sanitation, health, public transportation, communication, education and electricity despite the booming economic growth in recent years.

Ultimately, fuel subsidies undermine Indonesia’s energy security by encouraging extravagant demand as fuel prices are relatively low. With Indonesia’s oil production output stagnating, the government would have to import more oil. Dependence on foreign sources renders Indonesia’s energy security vulnerable to supply disruptions and rapid price fluctuations.

In addition, heavily subsidised fuel consumption also undermines Indonesia’s effort to diversify its energy intake, as demand for cheaper fuel will undermine demand for other forms of available energy. Furthermore, excessive consumption could also lead to a supply crisis as it boosts fuel consumption far beyond the allotted quota.

The path to reallocating fuel subsidy funds is politically difficult. First, Jokowi would have to convince the opposition to pass the proposed revision to the budget, which was approved by parliament in September. The government’s coalition would have to secure an additional 20 per cent of parliamentary votes to acquire a simple majority. Golkar and the Democrat Party (PD) would be ideal allies. However, political developments in Golkar, combined with the Indonesian Democratic Party of Struggle’s (PDI-P) rivalry with PD, may have closed this opportunity in the short term.

The infancy of the new administration will also be a challenge. Putting forward such a bold program so early in the life of the government may invite a severe public backlash. Anger would be directed at the PDI-P as the party has always rejected President Yudhoyono’s policy to increase the price of fuel. Such a flip-flop would weaken PDI-P’s popularity in the future.

Ultimately, time is not on Jokowi’s side. The primary concern is how to cushion the poor from the negative implications of expected price hikes. The new administration would have to introduce temporary relief to minimise such impacts. Finding a solution within a tight deadline may be challenging for the administration.

There are a series of steps to enact fuel subsidy reform, but considering the challenges Jokowi faces, it is of utmost importance to develop a plan to cushion the poor from the adverse economic effects.

Direct cash assistance schemes may be a viable short-term option. But such a policy would not tackle the fundamental problem of economic empowerment, as the poor will face the same economic hardship after the cash assistance program ends.

The best solution would be to redirect the fuel subsidy fund into infrastructure development to encourage job creation, thus increasing the purchasing power of the poor. Unfortunately, such a program would take too long to materialise. The new administration would have to find a balance between short and long-term measures to alleviate potential negative consequences.

Most importantly, the public needs to be assured that the fuel price hike does not mean that fuel subsidy funds are being reduced, but rather reallocated into other sectors essential for the people’s social welfare.

Keoni Indrabayu Marzuki is a research asociate of the Indonesia Programme at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University.

This article was first published here, as RSIS commentary CP14198.

Categories: Forum

Very few limits in tough Australian anti-terror laws

East Asia Forum - Mon, 10/20/2014 - 14:43

Author: George Williams, UNSW

Australia, like other nations, is facing an enhanced threat to its national security from citizens who travel to conflicts in Iraq and Syria, and then return home with a radical outlook and training in terrorism. This has led the government to raise the nation’s terrorism public alert level to ‘high’, which indicates that a ‘terrorist attack is likely’.

The Australian government, led by Prime Minister Tony Abbott, has embarked on the biggest expansion of Australia’s anti-terror laws since the 2005 London bombings. In doing so, it is building upon the extraordinary number of anti-terrorism laws already enacted in Australia.

Prior to this latest round of law-making, the Australian Parliament had enacted 61 anti-terrorism laws. Australia’s output of anti-terrorism laws exceeds that of nations facing a higher threat level. In an analysis spanning a number of democratic nations, Professor Kent Roach of the University of Toronto has described Australia’s response as being one of ‘hyper-legislation’.

Australia’s anti-terrorism laws are striking not just in their volume, but, more significantly, in their reach. In particular, the laws include three regimes not currently found in any comparable country, such as the United States, the United Kingdom or Canada.

The first regime enables the Australian Security Intelligence Organisation (ASIO) to question and detain any person, including Australian citizens not suspected of terrorism. They can be held in secret for a week and jailed if they refuse to answer any question put to them by ASIO. Journalists can also be jailed if they report on the operation of the regime. No other democratic nation permits its domestic spy agency to carry out this kind of action.

The second is preventative detention orders, which permit a person to be held without arrest or charge in secret detention for up to 14 days. The person cannot tell anyone they are being detained, or for how long. They can only contact their employer and one family member to say they are ‘safe, but not able to be contacted for the time being’. It has never been clear where Australia got the idea for this regime. Again, not even nations facing a long-term, higher threat of terrorism, such as the United States, have enacted such a law.

Under the third regime, control orders can be sought by the government to regulate almost every aspect of a person’s life, ranging from where they work or live to the people to whom they can talk. A person can even be subject to house arrest. All this can occur without a trial. Australia copied this scheme from the United Kingdom. But the United Kingdom’s scheme has since been repealed in favour of a less intrusive regime, leaving Australia alone in maintaining such a law.

These three regimes were enacted at the height of the ‘war on terror’ and are due to expire in 12 to 18 months. None has proven to be effective or necessary and all have been recommended for repeal by independent inquiries and reports.

Instead the Abbott government has announced that, as a response to the problem posed by foreign fighters, each of these regimes will be extended for a further 10 years.

In addition, new legislation will introduce a range of new measures. One Bill already passed by Parliament allows greater surveillance of computer networks, grants immunity from prosecution to intelligence officers engaged in special operations and exposes journalists to jail for up to 10 years for publishing even general information about such special operations.

A second Bill now in Parliament covers a wide range of matters, including the retention of biosecurity data from people entering or leaving Australia. It also introduces new criminal penalties for advocating terrorism and would allow Australians to be jailed for up to 10 years for entering any area declared by the government to be a no-go zone on the basis that a listed terrorist organisation is engaging in hostile activity there. A person could escape conviction only by proving that they went to the area solely for a reason identified by the government as being legitimate.

A third bill is also proposed. It will require telecommunications companies to retain metadata information on calls and internet use.

Law-making about terrorism is far from over. In Australia’s case, the fact that it is the only democratic nation in the world without some form of national Bill of Rights is telling. The absence of this check means that there are very few limits to the laws that Australia might pass in response to the threat of terrorism.

George Williams is the Anthony Mason Professor of Law at the University of New South Wales.

Categories: Forum
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